European Central Bank cuts rates, Lagarde flags downside risks to inflation outlook

This was CNBC's live blog covering the European Central Bank's October meeting.

The European Central Bank on Thursday cut its key interest rate to 3.25%, in its third quarter-percentage-point reduction of the year.

The move at the October meeting had been fully priced by markets after policymakers flagged reduced inflation risks and a weakening growth outlook.

In a statement following the decision, the ECB's Governing Council called the process of disinflation "well on track" in its most optimistic statement in the current cycle.

"The inflation outlook is also affected by recent downside surprises in indicators of economic activity," it said.

Headline price rises in the euro area eased to 1.8% in September, coming in below the central bank's 2% target for the first time in three years.

The ECB once again forecast that inflation would "rise in the coming months, before declining to target in the course of next year."

It is the first time the ECB has reduced rates at consecutive meetings since December 2011.

The ECB only debated a 25 basis point rate cut, rather than a larger 50 basis point cut, as opted for by the U.S. Federal Reserve in September, ECB President Christine Lagarde said during a Thursday press conference.

"We thought it was the appropriate decision to make in view of the moment, in view of the indicators that we have, and our assessment of this disinflationary process that is really underway and well on-track," Lagarde said, when asked by CNBC's Annette Weisbach why it did not cut by a half-percentage point.

Expectations for a faster pace of monetary easing had built since the ECB's Sept. 12 meeting, when market pricing suggested just one more rate cut this year, rather than the two priced in as of Thursday morning.

Along with the latest inflation print on Oct. 1, that shift in sentiment came amid dovish comments from various ECB members. ECB's Lagarde also swayed markets when she said the latest data readings "strengthen our confidence that inflation will return to target in a timely manner."

Another key factor has been the euro zone growth outlook. The ECB trimmed its euro zone growth forecast for 2024 last month on the back of weaker domestic demand, now projecting an 0.8% GDP rise, compared with 0.9% previously. Some of its biggest economies continue to face major challenges, including manufacturing weakness in Germany and a huge fiscal consolidation project looming in France; while sentiment indicators remain weak.

Watch back President Christine Lagarde's press conference here:

Lagarde: ECB only debated 25 basis point cut despite weaker-than-expected economic activity

The ECB only debated a 25 basis point rate cut, rather than a larger 50 basis point cut, as opted for by the U.S. Federal Reserve in September, Christine Lagarde said.

"It is a fact that the economic activity has come in — on the basis of the … indicators that are available — a bit lower than we anticipated," Lagarde said, when asked by CNBC's Annette Weisbach why it did not cut by a half-percentage point.

"But this is not a projection exercise, we are in between two projection exercises and clearly December will be another opportunity for us to run all the data through our models," she continued.

"What was on the table, and what was debated and proposed by our Chief Economist Philip Lane, was a 25 basis point cut. End of the story."

"We thought it was the appropriate decision to make in view of the moment, in view of the indicators that we have, and our assessment of this disinflationary process that is really underway and well on-track."

— Jenni Reid

'Probably more downside risk than upside risk' to inflation forecast, Lagarde says

There is "probably" more downside than upside risk to the ECB's inflation forecast, the group's President Christine Lagarde told CNBC's Annette Weisbach during the post-decision press conference.

Asked about recent warnings that the ECB now faces a return of its old challenge of too-low inflation, Lagarde said: "We can debate ad nauseum on this particular matter, and you will find views on both sides of the equation."

"What is clear to all is that we still have risks on both sides of our forecast, both upside and downside, probably more downside risk than upside risk, but I am talking here about our forecast for inflation," she added.

— Jenni Reid

Decision to cut rates was unanimous

The ECB's Governing Council voted unanimously to cut interest rates by 25 basis points, the central bank's President Christine Lagarde said Thursday in the post-meeting press conference.

The ruling to cut rates in September was also unanimous, while there was one dissenter to the June decision — Austrian central bank head Robert Holzmann, who voted to hold at the time.

— Jenni Reid

Lagarde lays out economic challenge for euro area

ECB President Christine Lagarde laid out the host of weak spots in the euro area economy, after the central bank indicated depressed economic activity would help keep inflation down in the months ahead.

Manufacturing performance has continued to contract, services activity is dropping off after a stronger summer, businesses are slow to invest, housing investment continues to fall, exports have weakened and households still consume less, she said.

"We expect the economy to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment, exports should contribute to the recovery," Lagarde said.

— Jenni Reid

Lagarde: 'We are not pre-committing to a particular rate path'

Despite flagging various more positive indicators — including easing labor cost pressures, a key area of concern — the ECB is "not pre-committing to a particular rate path," the central bank's President Christine Lagarde said during her press conference.

She also repeated past messaging that the Governing Council is "determined to ensure inflation returns to our 2% target in a timely manner," and that rates will remain restrictive for as long as possible to achieve that.

The approach remains "data-dependent and meeting by meeting," she said.

— Jenni Reid

ECB's message is that weaker economic activity will drive inflation lower next year, economist says

The ECB is letting markets know they should "probably ignore" an uptick in headline inflation in the latter half of this year, Mariano Cena, senior European economist at Barclays Investment Bank, told CNBC following the rate cut announcement.

"Going into next year the key forces, the permanent ones that will be driving inflation lower, that is weaker economic activity," Cena said.

— Jenni Reid

German, Italian bond yields marginally higher after ECB decision

Bond yields edged marginally higher in the wake of the ECB's ruling to trim interest rates for the third time this year.

Germany's 10-year bond yield edged 3 basis points higher to 2.204% at 1:40 p.m. London time, with Italy's 10-year bond yield rising just under 1 basis point to 3.412%.

Declines in interest rates typically lift bond prices and drive a fall in bond yields.

— Ruxandra Iordache

ECB President Christine Lagarde to deliver press conference shortly

European Central Bank President Christine Lagarde will deliver a press conference at 1:45 p.m. U.K. time (8:45 a.m. ET).

While the October interest rate cut was fully expected by the market, attention will now shift to whether Lagarde will drop hints about the path ahead for monetary policy, including the likelihood of a December cut.

— Jenni Reid

ECB must now focus on keeping the economy 'afloat': Quilter Investors

The ECB's latest cut came in line with analyst expectations, given "sluggish" economic growth and the euro zone's inflation now sitting "well below" the central bank's target, Lindsay James, investment strategist at Quilter Investors, said after the decision.

"The economy is in desperate need of stimulus, and the ECB will be hoping this third rate cut will begin to make a difference. Today's news will at the very least bring some relief to consumers and businesses which could boost confidence and subsequently help towards the economic recovery," James said, noting that the ECB will be keeping an "extremely close eye" on emerging data ahead of its December meeting.

"It will be pleased that inflation has finally come in lower than target, but keeping the economy afloat will be its next challenge," James said.

— Ruxandra Iordache

ECB says labor cost pressures 'set to continue easing gradually'

The Governing Council's October statement struck the body's most upbeat tone on the course of inflation in the current cycle, stressing that the "disinflationary process is well on track."

"Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation," the GC added.

In September, ECB staff forecast headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.

Another set of staff projections is not due until December.

— Jenni Reid

ECB says inflation outlook impacted by weaker economic activity

The European Central Bank's Governing Council said the inflation outlook had been "affected by recent downside surprises in indicators of economic activity."

Business activity in the euro area as measured by the Purchasing Managers' Index decreased for the first time in seven months for the week of 12-19 Sept.

— Jenni Reid

European Central Bank delivers quarter-point interest rate cut

The European Central Bank on Thursday lowered the deposit rate by 25 basis points, delivering back-to-back rate cuts for the first time in 13 years.

The move, which had been widely expected, marks the central bank's third interest rate cut of the year.

— Sam Meredith

Euro area bond yields slightly higher

Germany's 10-year bond yield, the benchmark for the euro zone, rose 2 basis points to 2.198% shortly ahead of the ECB's interest rate announcement. The yield on 2-year bunds was up by just over 1 basis point at 2.176%

French bond yields also moved slightly higher, with the 10-year up by 3 basis points at 2.938%.

— Jenni Reid

Weaker euro zone growth prospects have pushed ECB to October rate cut, CIO says

Weaker growth prospects in the euro zone — particularly in Germany — have spurred the ECB into an October rate cut that was not expected three weeks ago, according to Iain Stealey, international chief investment officer of global fixed income currency and commodities at J.P. Morgan Asset Management.

That includes weaker Purchasing Managers' Index figures and "soggier" inflation that is now below-target, he told CNBC's "Street Signs Europe" on Thursday.

"I do think Christine Lagarde's going to want to try to distance herself from absolutely fully committing to [a cut in] December. We've just seen a 50 basis point [cut] from the Fed, and maybe there's question marks as to whether that was right, given the data we've seen since."

But, Stealey added: "We are seeing weakness in the euro zone. It does deserve, at the moment, to be on a path of continual cuttings, I think that's absolutely fair."

Martins Kazaks, an ECB policymaker and governor of Latvia's central bank, told Reuters earlier this month that the case for an October rate cut was clear, given risks to growth.

— Jenni Reid

Economists forecast more back-to-back ECB cuts amid spectre of too-low inflation

Economists predicted a continuation of back-to-back ECB rate cuts in notes over the last week, as some raised the possibility that the central bank could soon face the danger of too-low inflation.

Jack Allen-Reynolds, Capital Economics' deputy chief euro zone economist, foresees a 25 basis point rate cut on Thursday and at each coming meeting until the deposit rate hits 2.5%, from the current 3.5%.

Market consensus is for a rate of 2% by the end of 2025, according to Dutch bank Rabobank, with market pricing at around 1.88%.

Economists at Goldman Sachs forecast an even swifter course of rate cuts, with sequential trims taking the deposit facility to 2% by June 2025. Bank of America Global Research meanwhile sees a continuation from there to a rate of 1.5% by the end of the year.

That aggressive course of monetary easing would come as some argue the ECB is now facing the additional challenge of ensuring inflation does not fall back to the persistent lows seen before the pandemic, which caused it to hold rates in negative territory for years.

French Central Bank Chief Francois Villeroy de Galhau told Italy's La Repubblica newspaper earlier this month that undershooting the 2% inflation target was a risk the ECB was monitoring.

— Jenni Reid

Euro edges lower against the U.S. dollar

The euro traded 0.1% lower at $1.0852 on Thursday morning, as investors looked ahead to the next monetary policy decision from the European Central Bank.

The ECB is widely expected to deliver a quarter-point interest rate cut for the second consecutive meeting later in the day.

— Sam Meredith

ECB will stick to gradual rate reductions given geopolitical risks, professor says

The ECB will stick to gradual rate cuts through the first half of next year, given geopolitical risks, Mojmir Mrak, professor at Ljubljana University's School of Economics and Business told CNBC's "Squawk Box Europe" on Thursday.

"If you compare what happened immediately after last meeting and today, the expectations were that [rates] would go down slower," Mrak said.

"Now I think we are on the path that interest rates will go down, that's my view. I think the central bank will do this gradually because we should not forget that we are living in an extremely unstable world. If something larger happens in the Middle East with the oil prices, we can have immediately a change."

A gradual pace could still see 25-basis-point cuts in October and December, with further small reductions taking place throughout the first half of next year, Mrak noted.

— Jenni Reid

European stocks mixed, euro flat ahead of rate announcement

European stock markets were mixed at Thursday's open, with the benchmark Stoxx 600 index eking out a 0.13% gain at 8:12 a.m. in London. Banks were the best-performing sector, up 0.75%.

Germany's DAX and France's CAC 40 were both higher by around 0.5%, pulling ahead of the U.K.'s FTSE 100, which remained near the flatline.

Movements in the euro were muted, with the currency down 0.09% against the U.S. dollar and fractionally higher against the British pound.

— Jenni Reid

Lack of ECB guidance is supporting euro against U.S. dollar, Goldman economist says

The euro is being shielded from sharper losses against the U.S. dollar — despite more robust economic growth in the U.S. — in part because the European Central Bank is not giving strong guidance on its future path, Goldman Sachs' Chief Europe Economist Jari Stehn told CNBC's "Squawk Box Europe" on Thursday.

"The ECB is cutting, but is cutting in a very data-dependent fashion, without giving you an awful lot of guidance about where you're headed next. And we think that's very much going to be the message also today," Stehn said.

"So we'll get the 25-basis-point cut, we think they will say we're doing this in response to weaker data."

"I think [ECB President Lagarde] will say, Look, if inflation continues to fall we can cut more, but the extent, the rhythm, all of that will depend on the data. So now I do think markets understand this message quite well."

The euro has been choppy against the greenback throughout this year, starting out at $1.1044 and falling to $1.0853 as of Thursday.

Stehn also told CNBC that caution around prospects for the euro zone economy was warranted.

"The incoming data has been weak, we obviously have various challenges, from trade to fiscal to the manufacturing sector. We have cut our forecast a couple of times through the summer, we basically have growth of 1% over the next year, which is below what the ECB has," he said.

"Now, that said we still think we're growing. So we're not saying we're going into recession, we're not saying we're totally stagnating."

— Jenni Reid

Markets pricing two more rate cuts by end of the year

Financial markets have fully priced in two more 25-basis-point interest rate cuts from the ECB this year, expected to take place on Thursday and at the central bank's next monetary policy meeting in December.

That would take the deposit facility — the ECB's key rate — from 4% in June to 3% by the end of 2024.

The ECB was one of the first major central banks to cut rates when it lowered by a quarter-percentage-point in June. The U.S. Federal Reserve did not join it on the path of monetary easing until September, when it cut its own key rate by a half-percentage point.

— Jenni Reid